Saturday, September 22, 2007

Keeping Tabs on Stock Market Sentiment

I observed a while back that the traffic statistics for this blog seem to be reflective of market sentiment. During the brief March plunge and especially during the August weakness, the traffic to this site expanded significantly. I found that these increases were not related to external sites linking to mine. Indeed, I could even track sensitivity to market conditions hour-by-hour: during very weak intraday periods, traffic for that hour expanded well above its norm.

Conversely, during July--prior to the market decline--I noticed a distinct dropoff in visits to the site. On slow market days such as Friday, I also notice less blog traffic.

Since mentioning these patterns, other market bloggers have contacted me and mentioned that they've observed similar phenomena. It appears that, during periods of high market uncertainty and volatility, one way that traders and investors cope is to seek information. This manifests itself in increased Web surfing of blogs and other sites that post in a timely fashion.

The reason I bring this up is that, even apart from the slow day on Friday, I've noticed that my traffic statistics are looking more like early July and less like August. Traders don't seem to be reaching out for information in the frantic way that they had been doing during the market decline.

I decided to examine the five-day equity put-call ratio (see chart above) and plot it against the S&P 500 Index (SPY). Sure enough, the put/call ratio has also tailed off as the market has turned around. Option-related sentiment is not far off its early July levels. The put-call ratio has closely followed the traffic patterns on the blog.

Does this mean the market is headed for a sustained decline? Not necessarily. What I've found is that the combination of a weakening market (fewer stocks making fresh 20-day highs; fewer stocks trading above their 50 day moving averages; fewer stocks closing above their volatility envelopes; reduced levels of Cumulative Adjusted NYSE TICK) and bullish market sentiment is the setup for a meaningful correction.

Thus far, during the past week, we've seen solid strength in these indicators (which I track daily in my Twitter comments and summarize weekly in my Trading Psychology Weblog). It's when we see sustained divergences that we want to be lightening our exposure to stocks.

"Freedom from the desire for an answer is essential to the understanding of a problem." -- J Krishnamurti

The rise in page views on your blog during times of volatility and uncertainty just reveals what the wise should already know: Fools reveal themselves when their questions are not answered with ease...

Sentiment is my bag, and I've noticed something similar. I track activity on Traders-talk.com and I've found that spikes in activity have been rather well correlated with market turns. It's not a perfect indicator, I can tell you, but it's pretty wild in some cases. I call it the T-4 indicator (traders-talk timing tool) and while it's quasi proprietary, one could recreate it by counting posts, and I do an updated chart whenever we get a signal and post it for the public.

It's interesting that someone else is tracking activity as a sentiment indicator. Actually, it's gratifying. We'd love it if you'd come by occasionally and post. We are a moderated site, too.

There's a chart of the T-4 indicator linked below, if you're interested.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).